Use the following data for questions 10 through 17. Each question is independent of the other questions.
Sawyer Corporation has a machine (Machine A) that it acquired on 1/1/14 for $540,000. On 12/31/14 such machines have a selling price and fair value of $621,000. When used in production, such machines have an estimated useful life of 10 years with no salvage value. Use the straight-line method.
Brown Corporation has a machine (Machine B) that it acquired on 1/1/14 for $729,000. On 12/31/14 such machines have a selling price and fair value of $540,000. When used in production, such machines have an estimated useful life of 10 years with no salvage value. Use the straight-line method.
On 12/31/14 Brown gave Machine B plus $81,000 cash to Sawyer in return for
Machine A.
-Given the assumption in 12 above, at what amount will Sawyer record Machine B?
A) $557,609.
B) $405,000.
C) $503,604.
D) $422,609.

Question

Quizplus · Accepted Answer

Sawyer will record Machine B at its fair value of $540,000. However, since Brown also gave $81,000 cash, the total consideration received by Sawyer is $621,000. Therefore, Sawyer will record Machine B plus cash received at $621,000. To determine the cost basis for Machine B, we subtract the accumulated depreciation as of 12/31/14, which is equal to ($729,000 / 10 years) x 1 year = $72,900. Therefore, the cost basis for Machine B is $729,000 - $72,900 = $656,100. Finally, we allocate the cost basis to Machine B and the cash received based on their relative fair values. Machine B is allocated 87.21% of the cost basis ($540,000 / $621,000), which is equal to $571,459. The cash received is allocated 12.79% of the cost basis ($81,000 / $621,000), which is equal to $81,141. Therefore, Sawyer will record Machine B at $571,459 and the cash received at $81,141, for a total consideration received of $652,600 ($571,459 + $81,141). Rounded to the nearest thousand, the answer is $423,000. Therefore, the best choice is D.

Use the Following Data for Questions 10 Through 17